Low domestic savings rate and the problems it causes are being discussed more frequently in the recent period. I also wrote a couple of commentaries on this issue. There are several reasons why low savings rate is being frequently discussed.

First, countries that raise domestic savings rate permanently can achieve a higher growth rate per capita for a substantial period. As a natural outcome, per capita income level exceeds the earlier levels which also prove permanent. Second reason results from a widely known equilibrium: Current account deficit can be defined as the sum of two differences. First is the difference between private sector investments and private sector savings. In this lens, importance of the sum of private sector savings and public sector savings (revenues) arises automatically. Higher the private sector investments and public expenditures above the sum of savings, higher is the current account deficit. However, there exists a natural outcome: If you cannot access foreign funds to finance the deficit, you cannot have a deficit at that level. In other words, investments and public expenditures do not reach the desired level. To put it differently, growth rate is constrained.

So, you start thinking on how external conditions evolve. Global financial crisis will most probably change completely the course of the game in global financial markets for two reasons: First, financial system has collapsed and is newly recovering. Amount of funds it can provide is limited. Second, it is known that the least regulated and controlled section of the financial system is the main cause of the financial crisis. Rules of the game in this sector called shadow financial sector will change completely. The sector will definitely be subjected to regulation and control. This issue was to come on the agenda even it was not democrats but Bush administration in power in the USA. And it is as clear as a day that the democrats will advance on this huge problem; this determination can be observed in any speech of the officials.

If you put all of these together, the result is: It is a high possibility that the amount of funds countries like Turkey will reach through 'external financing style' as they are used to since the early 1990s. Here, 'style' refers to financing from private sector to private sector.

Now, if you feel such potential danger, the point you reach is: Even in good old days where foreign funds were abundant, insufficient domestic savings constrained growth rate. Current account deficit increased significantly even in periods of high growth. If in the 'new financial system' amount of foreign funds will be lower; how can we achieve high growth?

There are at least three ways that does not exclude one another. First is, as Turkey, contributing in the design of the way the new financial system transfers funds to countries like Turkey. Guven Sak has addressed this issue on his column in Referans daily. Second is dwelling on how to raise domestic savings rate. Hasan Ersel has brought forward this issue with an article series in Referans daily. Third is focusing on reforms that directly improve the competitiveness of Turkey and level of per capita income. Let me repeat; none of them excludes one another. It is theoretically possible to accomplish each of these. I will try to elaborate on this issue tomorrow.

This commentary was published in Radikal daily on 26.07.2009